Home Equity Loans: Common Questions and Answers

Written by Skolnick Law Firm. Posted in Articles

The Texas Constitution protected homesteads from forced sale for 158 years. All that changed on January 1, 1998, when a voter-approved amendment to the constitution took effect. This law allows certain loans to be secured against the equity in a home; such loans are commonly known as home equity loans. If the loan is not repaid or the terms of the loan are not met, the lender may foreclose and sell the home.

What is a home equity loan?

Homeowners can borrow money using up to 80 percent of the value of their home as collateral.

"Equity" is the value of a home minus any liens or mortgages that are secured by the home. For example, for a $1 00,000 home with an outstanding mortgage of$30,000, the homeowner has equity of$70,000. If there were no mortgage or lien, the equity would be $100,000.

How much can I borrow?

If, for example, your home was valued at $100,000 with a $30,000 mortgage, you could borrow against up to 80 percent. In other words, 80 percent of $100,000 is $80,000. Subtracting the $30,000 mortgage, you are left with $50,000 to borrow.

How much will a home equity loan cost?

Home equity loans usually have lower interest rates than other types of consumer loans, other than first mortgages. The specific rate is determined by competition among creditors and the borrower's own credit history. A borrower cannot be required to pay fees, in addition to interest, in excess of three percent of the principal amount borrowed.

Are there different kinds of home equity loans?

Yes, there are two basic types of home equity loans: first mortgages and secondary mortgages. A first mortgage is a loan secured when an individual buys a home, or it can be a refinancing of an existing mortgage. A secondary mortgage is a loan secured by a homestead that has at least one other mortgage or lien.

How can I use the money?

However you choose. There are no legal restrictions; however lenders may set their own limitations. For example, some lenders may only offer home improvement loans.

What if I change my mind?

The law requires a 12-day waiting period after a consumer submits an application and receives written notice of his or her consumer rights. This means you have 12 days to change your mind before the loan is closed. Read the notice carefully-the Texas Constitution gives you important protections as a home equity loan consumer. No prepayment penalties are allowed, and the lender cannot make you use your home as collateral on any other loan. Both spouses must sign all loan documents. Additionally, the homeowner or homeowner's spouse can cancel the contract without penalty within three days after the closing.

How many home equity loans can I have? 

Only one at a time, and the loan cannot be refinanced more frequently then once a year.

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